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Book Description

A forceful argument against America's vicious circle of growing inequality by the Nobel Prize–winning economist.

America currently has the most inequality, and the least equality of opportunity, among the advanced countries. While market forces play a role in this stark picture, politics has shaped those market forces. In this best-selling book, Nobel Prize–winning economist Joseph E. Stiglitz exposes the efforts of well-heeled interests to compound their wealth in ways that have stifled true, dynamic capitalism. Along the way he examines the effect of inequality on our economy, our democracy, and our system of justice. Stiglitz explains how inequality affects and is affected by every aspect of national policy, and with characteristic insight he offers a vision for a more just and prosperous future, supported by a concrete program to achieve that vision.

A forceful argument against America's vicious circle of growing inequality by the Nobel Prize–winning economist.

America currently has the most inequality, and the least equality of opportunity, among the advanced countries. While market forces play a role in this stark picture, politics has shaped those market forces. In this best-selling book, Nobel Prize–winning economist Joseph E. Stiglitz exposes the efforts of well-heeled interests to compound their wealth in ways that have stifled true, dynamic capitalism. Along the way he examines the effect of inequality on our economy, our democracy, and our system of justice. Stiglitz explains how inequality affects and is affected by every aspect of national policy, and with characteristic insight he offers a vision for a more just and prosperous future, supported by a concrete program to achieve that vision.

Editorial Reviews

Review

“The single most comprehensive counterargument to both Democratic neoliberalism and Republican laissez-faire theories. While credible economists running the gamut from center right to center left describe our bleak present as the result of seemingly unstoppable developments—globalization and automation, a self-replicating establishment built on 'meritocratic' competition, the debt-driven collapse of 2008—Stiglitz stands apart in his defiant rejection of such notions of inevitability. He seeks to shift the terms of the debate.” (Thomas B. Edsall - New York Times Book Review)

About the Author

Joseph E. Stiglitz received his PhD from MIT in 1967, became a full professor at Yale in 1970, and was awarded the John Bates Clark Award in 1979, which is given biennially by the American Economic Association to an economist under 40 who has made the most significant contribution to the field. He has taught at Princeton, Stanford, and MIT, and was the Drummond Professor and a fellow of All Souls College, Oxford. He is now a professor at Columbia University and co-chair of Columbia University's Committee on Global Thought. He is also the co-founder and co-president of the Initiative for Policy Dialogue at Columbia. In 2001, he was awarded the Nobel Prize in economics for his analyses of markets with asymmetric information, and was a lead author of the 1995 Report of the Intergovernmental Panel on Climate Change, which shared the 2007 Nobel Peace Prize. In 2011, Time named Professor Stiglitz one of the 100 most influential people in the world. Professor Stiglitz was a member of the Council of Economic Advisers from 1993–95, during the Clinton administration, and served as its chairman from 1995–97. He then became chief economist and senior vice president of the World Bank from 1997–2000. In 2008, he was asked by the French President Nicolas Sarkozy to chair the Commission on the Measurement of Economic Performance and Social Progress, which released its final report in September 2009. In 2009, he was appointed by the President of the United Nations General Assembly as chair of the Commission of Experts on Reform of the International Financial and Monetary System, which also released its report in September 2009. Professor Stiglitz helped create a new branch of economics—The Economics of Information—exploring the consequences of information asymmetries and pioneering such pivotal concepts as adverse selection and moral hazard, which have now become standard tools not only for theorists but also for policy analysts. He has made major contributions to the theories of welfare economics and of income and wealth distribution, and his work has helped explain the circumstances in which markets do not work well and how selective government intervention can improve market performance. Recognized around the world as a leading economic educator, Professor Stiglitz has written books that have been translated into more than a dozen languages. He also founded one of the leading economics journals, The Journal of Economic Perspectives. His book, Globalization and Its Discontents (Norton, 2001), has been translated into 35 languages and has sold more than a million copies worldwide. Other recent books include The Roaring Nineties (Norton); Towards a New Paradigm in Monetary Economics (Cambridge University Press), with Bruce Greenwald; Fair Trade for All (Oxford University Press), with Andrew Charlton; Making Globalization Work (Norton and Penguin/ Allen Lane, 2006); The Three Trillion Dollar War: The True Cost of the Iraq Conflict (Norton and Penguin/ Allen Lane, 2008), with Linda Bilmes at Harvard University; Freefall: America, Free Markets, and the Sinking of the World Economy (Norton and Penguin/ Allen Lane, 2010); and The Price of Inequality: How Today's Divided Society Endangers Our Future (Norton and Penguin/ Allen Lane, 2012).

The Price of Inequality is an eloquent analysis of inequality in the United States and what it means for our political system, economy and society. The book does a good job of laying out the facts.

One sentence basically says it all: "The top 1 percent of Americans gained 93 percent of the additional income created in the country in 2010, as compared with 2009." Now think of that in terms of a party with 100 people and big pizza with 100 slices. Basically it means that one rich guy gobbles up 93 slices of pizza. The other 99 get to divvy up the other seven.

Stiglitz does an especially good job of refuting the received wisdom among conservatives: that incomes are in proportion to productive contribution to society. Instead, the book shows that much of our extraordinary income concentration is due to "rent seeking" by the wealthy elite, and that very often this involves taking advantage of taxpayers. We have a system that actively redistributes income and wealth from huge numbers of people at the bottom of the pyramid to a tiny number at the very top.

As the book shows, extreme income inequality is really a kind of cancer that infects almost every aspect of our social, political, economic and even legal system. A tiny elite is able to effectively purchase laws and regulations that work in its favor. For example, bankruptcy laws are designed to favor banks over homeowners and holders of student debt, even though the banks have access to much better information and expertise when making these loans. One idea that occurs throughout the book is that we should have "one person one vote" not "one dollar one vote." and yet the evidence is clear we are moving toward even more influence for those with money.

Income inequality and wealth inequality have skyrocketed in the last 30 years. There is no dispute about this, but there are disputes over both the causes of this phenomenon and its effects.

In one sentence summary for those of you who like a very short review, this book has a threefold agenda. First to document the widely accessible and now well-known phenomenon of inequality, second to explain its cause and third understand its effects.

Also note that Stiglitz's book is very much an elaboration of his 2011 Vanity Fair article "Of the 1%, for the 1%, by the 1%." This article provides an excellent summary of the basic argument.

Stiglitz's book is really two books, the first book is 290 pages of very well argued and accessible text aimed at the above threefold agenda. The second book is 100 pages of notes, documentation, and very excellent citations and references. My review will concentrate on the text.

In chapter one Stiglitz emphasizes that the phenomena of income inequality has been occurring well before the financial crisis of 2008. Indeed inequality is suggested to be a root cause of the crisis itself. From pre-crisis, 1979 - 2007, the richest 1 percent of Americans received 60 percent of all gains income growth, the richest 5 percent of Americans received 80 percent of all income gains, while the 90 percent of American households receive 8.6 percent. These staggering statistics are completely unprecedented in U.S. history.

Indeed if we look closer most Americans were actually becoming worse off with respect to inflation-adjusted income from 1979 - 2007. Stiglitz writes: "While the top 1 percent was doing fantastically, most Americans were actually growing worse-off" (p. 3), even though real per capita GDP has increased by nearly 80 percent, "most American male full-time workers have seen their income go down" (p. 26).

Both income and wealth inequality is explained by the symbiotic relationship between markets and government. While "market forces help shape the degree of inequality, government policies shape those market forces. Much of the inequality that exists today is a result of government policy, both what the government does and what it does not do" (p. 28).

This latter point is absolutely essential to the argument of the book. Businesses which want to make profits will attempt to circumvent competition and achieve monopoly-like power. This can be difficult, but because of "asymmetric information" (e.g. sellers having more information than the buyer) many industries can accomplish monopoly-like power within the market process.

More importantly to Stiglitz, if monopoly-like power cannot be achieved by means of market processes and marketing, then there is always "rent-seeking" activity.

The financial industry is able to exploit both asymmetric information situations and achieve rents-seeking privilege. Stiglitz writes, "the form of rent seeking that is most egregious - and that has been most perfected in recent years - has been the ability of those in the financial sector to take advantage of the poor and uninformed (p. 32). This is because financial companies almost always know more about their product (mortgage, derivative, stock, etc.) then do their customers, and the industry has been able to minimize any regulation or action by the government to even the playing field.

According to Stiglitz it is rent-seeking activity and the rise of what Jamie Galbraith calls the "The Predator State" that is the main cause of the both wealth and income inequality. According to Stiglitz, the main cause of inequality is not globalization, education, or technological change, although they do play part (p. 30), rather the main cause is political manipulation of rules and regulations by American businesses which have entered American politics through lobbying and financing campaigns (p 40ff).

Also playing a supporting role in the rise of inequality is macroeconomic policy (chapter 9), the decline in unionization, the incentives of corporations, and tax policies of the government.

Thus the causes of inequality are first and foremost (1) rent-seeking activity and the rise of The Predator State, then (2) tax policy, (3) macroeconomic policy (4) corporate governance and regulation, or lack thereof, (5) decline in unionization, (6) globalization, (7) technological change, and (8) education.

Now, importantly only causes (6) and (7) are market determined forces, all other causes and the primary cause are socio-political phenomenon. The good news here, according to Stiglitz is because of these socio-political phenomenon are policy determined, rather than market determined, then a change in policy can reduce most, although not all, of the inequality.

Worse still, inequality is correlated with reductions in public investment to infrastructure and education, "massive distortions in the economy (especially associated with rent seeking), in law, and in regulations", and has negative effects on workers' and citizens morale (p. 94).

Stiglitz dedicates a chapter to the negative effects inequality has on democracy (see Larry Bartels, for an excellent argument from which Stiglitz draws, Unequal Democracy: The Political Economy of the New Gilded Age. In other words, inequality is the _real_ road to serfdom and diminished freedom and weakened liberty. Economic inequality is at the same time political disempowerment, which places our "democracy in peril." Drawing heavily from behavior economics, chapter six explains how Americans misperceive the degree of inequality, fail to recognize its causes and misunderstand its consequences.

Chapter seven explains how inequality is now eroding the rule of law and created a nation of injustice and unfairness, diminishing socio-economic opportunities and political participation of citizens. In short, "inequality, combined with a flawed system of campaign finance, risks turning America's legal system into a travesty of justice" (p. 206)

The battle over the budget than is really a battle over inequality, while macroeconomic policy in the United States as made fetish of inflation at the neglect of other fiscal priorities, such as employment, infrastructure, and quality of life and personal security of citizens. "Macroeconomic and monetary policies that result in higher unemployment - and lower wages for ordinary citizens - are a major source of inequality in our society today. Over the past quarter century macroeconomic and monetary policies and institutions have failed to produce stability; they failed to produce sustainable growth; and, most importantly, they failed to produce growth that benefited most citizens in our society" (p. 264).

Stiglitz has solutions! (pp. 265-90) Reclaim the political process, curtail rent seeking activity and diminish political lobbying and the function of "The Predator State." Macroeconomic policy should not fetishize inflation, but emphasis employment policy and public investment in education, technology and infrastructure. Political policy should promote fairness and opportunity, curb excesses at the top, and institute real tax reform aimed at reducing inequality.

I'm generally a Republican voter who leans toward the small businessperson's agenda of favoring small government and the lowest practical amounts of taxes and governmental regulations. However, several things have challenged my view in recent years:

* The financial collapse of 2008 took most all of us by surprise. We didn't realize how fragile our economy was or how easily it could be brought to the very brink of complete meltdown. The progress of economic recovery has also been astonishingly slow and even now the prospect of another leg down seems to be looming.

* As a student of economics I am familiar with how old-time Progressives approached the depressions of the late 1800s and early 1900s. They recognized that the primary problem was an imbalance between production and consumption. Consumers did not earn enough income to purchase the goods and services that the capitalists produced. They understood that producers and consumers must prosper together, so they lobbied to raise the minimum wage, require the payment of premiums for overtime hours, encourage the formation of labor unions, and enact Social Security and Unemployment programs to provide a floor under purchasing power when the economy went slack. Franklin Roosevelt's New Deal was based on these ideas of raising consumer's purchasing power. I believe they did stabilize the economy in the 1930s and were the basis of our post-WWII prosperity.

* I'm a Reagan Conservative who believes that Reagan's Supply Side agenda of cutting taxes was correct economic policy in the 1980s. However, it is a much different thing to cut maximum marginal taxes from 70% to 28% as Reagan did than to cut them from 39% to 15% (capital gains and dividends) as Bush did. The fact that the economy collapsed in 2008 AFTER we reduced taxes on the higher incomes to their lowest levels since the 1920s and AFTER we repealed the banking regulations such as the Glass-Steagall Act leads me to believe that lowering taxes and deregulating business is not the proper economic policy in all circumstances.

* We have learned that malfeasance and even fraud were abetted and encouraged by too many of our corporate leaders. Companies like Enron, Worldcom, Healthsouth, and Arthur Anderson blew themselves up with accounting frauds. The nation's largest financial institutions like Bear Sterns, Lehman Brothers, Countrywide, AIG, Citibank, Bank America, Merrill Lynch destroyed themselves and very nearly brought down our entire economy by trading in fraudulent mortgage derivatives. I don't buy the conservative/corporate spin that this calamity was caused by too much government regulation. I think any intellectually honest person would have to conclude that it was a case of corporate greed being too little restrained by government oversight.

Thus I am open to the ideas of people like Joseph Stiglitz that I would have scoffed at prior to 2008. I think his most powerful starting point is:

=========================This book is not about the politics of envy: the bottom 99 percent by and large are not jealous of the social contributions that some of those among the 1 percent have made, of their well-deserved incomes.=========================

Stiglitz is right that the Democrats are unlikely to convince the general public that their agenda is correct by engaging in negative attacks on the wealthy. They need to convince voters that reducing income inequality will benefit the wealthy as well as the poor. They must make the case that when the lot of the less-well-off is improved there will be more purchasing power available to consume the goods and services that the wealthy produce by investing in new factories and new technologies, and thus more profits for them too. All must prosper together.

Most of the book is a description of the symptoms of our economic malaise: falling wages and declining employment, and wealth being concentrated among the relative few who enjoy privileged positions in business and government. Most readers will probably agree with Stiglitz's diagnosis that income inequality is the root cause of the Great Recession and our agonizingly slow recovery out of it.

He also makes some crucially important points such as that while there are many people who achieve wealth through product innovation (Bill Gates, Steve Jobs, Sergey Brin, Mark Zuckerberg) there are many others who achieve wealth by conspiring with others to manipulate markets. For example, CEO's who sit on each others' boards of directors collude to raise each others' compensation to levels that would have once been considered unseemly and irresponsible. Thus, wealth tends to become concentrated for reasons that do not always result from the legitimate operation of the free market.

He also explains how businesses often "capture" their intended government regulators, subverting them into becoming enablers of business malfeasance. He explains how the Federal Reserve, which is supposed to promote responsible banking practices, has been "captured" by the big bucks bankers. It has become their creature, dedicated to bailing them out with the taxpayer's money whenever they blow their banks out of the water with reckless speculations. He also makes the point that corporations have succeeded in "framing the debate" to their advantage, i.e. convincing politicians that is OK to vote to use taxpayer money to restore solvency to failed banks, but that is immoral to provide assistance to homeowners facing foreclosure.

He then addresses the macroeconomic picture of our unsustainable budget deficits.

Having gotten off to such a strong start, this book must unfortunately come to the difficult part of putting forth realistic proposals for reform. Like so many others, it is nebulous in its proposed solutions. It mentions unfavorable trade imbalances as costing us jobs, but doesn't say what we should do specifically to correct those imbalances. It laments the passing of the manufacturing economy overseas, but argues against imposing tariffs on imported manufactured goods. It says that labor unions are generally despised, but doesn't say what might be done to restore their respectability. It mentions wonkish-sounding ideas for regulating banks and businesses but doesn't explain them in an inspiring way that would make them popular planks in a campaign platform to carry to the people.

I would have preferred to see a more direct, hard-hitting agenda, in the tradition of a Pat Buchanan or Ross Perot POPULIST ECONOMIC CONSERVATIVISM, maybe something along the lines of:

1. Raise the minimum wage to $20 an hour. The best way to restore purchasing power is to increase the pay of people who work. The objection that raising the minimum wage decreases employment is a fallacy. Raising the minimum wage INCREASES employment by increasing the demand for goods and services.

2. Incentivize companies to increase employment. Any company that lays off its employees will have a surtax imposed on corporate profits. Companies that increase employment will receive a favored tax rate as low as 15%.

3. Raise the maximum personal income tax rate to 70% on incomes over $5,000,000. This will discourage managements from looting companies with excessive compensation. Corporate managements must become focused on the long-term sustainability of the businesses they are entrusted to manage, and not on diverting all of the cash flow into their own pockets. (Stiglitz does discuss the argument in favor of raising taxes on the highest incomes, but perhaps could have more fully explained why it is especially necessary at this point in the economic cycle.)

4. Impose tariffs on goods and services produced in countries that run chronic trade imbalances with us in goods and services we are able to produce domestically. The offending countries will have the option of equalizing the trade imbalance either by increasing their imports of US-made goods and services or of having the imbalance equalized by protective tariffs imposed by us. (Stiglitz actually seems to be much closer to being a free trader.)

5. Re-regulate the banking and financial markets so that banks are no loner able to squander their depositors' money by engaging in reckless speculations in risky markets. We will regulate the stock market in order to make sure that it serves the interests of legitimate investors, not fast-buck artists and hedge funds.

6. Reactivate the Antitrust Division of the Justice Department and use it to fragment the anti-competitive monopolies that have been built up over the previous generations. Businesses will no longer be allowed to suppress competition by buying out their competitors in mergers and acquisitions.

Stiglitz is cautious in discussing ideas like these. I get the impression (by his frequent use of the term "public investment") that his true agenda may be to pay lip service to reforming the private sector while funding a massive expansion of government ownership of the economy. If I am understanding him correctly, he is like Robert Reich in favoring a big-government economy whereby the Federal Government would own and operate bullet trains, wind farms, research and development parks, urban mass transit, jobs training schools, and so on. This is where I as a quasi-Conservative take issue with Stiglitz: I believe that government should REGULATE the economy but should not OWN it.

I also take issue with Stiglitz's using much of the book to bolster his idea that, "The failures in politics and economics are related" and then going on and on about there being too much big-money influence in politics. IMO, the Democrats are failing at the ballot box because they are pushing agendas that primarily benefit big-government elitists, not the majority of the voters who work in the rank-and-file jobs of the private sector. Let the Democrats and Progressives hone their agenda until it DOES benefit the rank-and-file and see if they do not get better results.

Stiglitz makes the Liberal economic case in a gentlemanly way that will not offend Conservatives. In fact the book seems designed to change the perceptions of Conservatives and Centrists by educating them in a well-reasoned, congenial way to the need for greater government oversight of the economy. I think Conservatives who read the book in good faith will broaden their thinking beyond the ideologically rigid "business good, government bad" platitudes of sophomoric conservatism.

However, the LACK OF BOLDNESS in stating specific reforms that would make our capitalist system work more toward the interests of the rank-and-file private sector workers may disappoint Progressives! It will take specific legislation, not just generalized theories to make a meaningful dent in the inequality problem. Thus, the book offers a spot-on diagnosis followed by weak medicine. So long as Democrat-leaning economists like Stigliz focus their efforts on indirect solutions like growing the public sector instead of dealing directly with low wages and job insecurity in the private sector, the Democrats aren't likely to attract enough voters to enact any of their agendas. One needs look no further than to the recent results in Wisconsin.Read more ›

More About the Author

Joseph E. Stiglitz is a professor of economics at Columbia University and the recipient of a John Bates Clark Medal and a Nobel Prize. He is also the former senior vice president and chief economist of the World Bank. His books include Globalization and Its Discontents, The Three Trillion Dollar War, and Making Globalization Work. He lives in New York City.